Why managing Relationships with Suppliers (SRM)?
Well, one could ask, why talking to my colleagues 🙂
Joke aside: Suppliers are key to success of your company. Most probably if you landed on this blog, suppliers are key to your career as well, because you are in:
- Supply Chain
- Category Management or Product Management
- Or collateral such as Production or Quality
SRM: supplier relationship management. Working with suppliers is like a marriage. Managing each other expectations is opening many more doors than negotiation only. There are 2 levels of expectations management:
- Reactive Supplier Management: yearly negotiation, claim management, change management
- Proactive Supplier Management: quarterly business reviews (QBR), Innovation management, Continuous improvement, Lean Management
And believe me, you will not only save much more money when you combine both, but as well have much more track records to show to your CEO on how you perform.
Purpose: the overall purpose of SRM is to structure, monitor, streamline, plan and make more efficient the processes between an organization and its suppliers on operational, tactical and strategic levels.
I have a post defining what is SRM in more details here.
If you haven’t started yet, it implies a real change management. And probably a bit of coaching. you can chose your internal mentor, or you can book a 30 minutes free discovery coaching here.
Supplier Segmentation and Supplier Selecting along your needs
You have several suppliers which cover several needs. You can roughly classify at high level into four clusters:
- Strategic suppliers. Usually brand sensitive.
- Specialists suppliers and niche suppliers. Usually brand sensitive.
- Commodities suppliers, based on pricing, availability and data quality
- Integrated suppliers and importers that manages products they don’t directly supply
This is one of the criteria, but not the only one, that you use in your supplier strategy to focus on what impacts your business.
Why reducing your supplier base: the 80-20 rule of SRM
When it comes to SRM, you shall always consider the length of your supplier base. One of rule of thumb I have seen my entire life is:
- 80% of the suppliers account for only 20% of the spend
- 50% of suppliers have less than two purchase orders a year
This is very bad: inefficiencies in ordering and inventory management by the book.
Bad is great! you have a wide ocean of opportunities for substantial savings by consolidating suppliers. Reducing the supplier base is not the main objective, but is surely to take into consideration.
(Jump directly here if you focus on this aspect)
4 Benefits of managing Relationships with Vendors
- Lower Costs & TCO (Total Costs of Ownership)
- Efficiency & operational increase
- Competitive advantage
Benefit 1: Lower Costs & TCO
Supplier negotiation preparation
Here it goes mostly towards the classical negotiation and price approach. Nothing new? Well, this is not black and white. I will tell you why, as it was in my role as Group Category Director.
The first year when I started my job from scratch (this was a job creation), I had only time and knowledge to negotiate prices on yearly basis. And I was really proud to save a 0,5-1% or something similar with my top10 suppliers.
Luckily, I was building a SRM parallel to this (You can have look here). When it came to the second year and next round of negotiation, I knew ALL I had to know before entering negotiation. I had a 360 degree overview of supplier performance, a strong dashboard with vendors KPIs and a clear benchmark with competitors.
Knowledge is negotiation power. Thanks to my new SRM, for one of this top10 suppliers (not the biggest sadly, but a middle big fish), I could achieve a -6,7% (I still remember in details, as it was eyes-opening to me). Just by pointing out its weaknesses, and being transparent about the strong performance of its competitors.
Imagine how much I have communicate internally about my SRM Tool and my negotiation result, sharing best practice.
TCO – Total Costs of Ownership
This is less obvious than price itself, but is straight forward when you think about it. If you understand the full value chain of your supplier, you can optimize several parameters from your side leading to TCO decrease.
1. Analysis: Thanks to the SRM dashboard, we could identify that our ordering approach on bi-monthly basis was extremely expensive for supplier: he had to adapt is machines too often, and was impacting those costs into our prices.2. Action: Balancing the cash impact (one aspect of supplier scorecard: financial criteria) of monthly ordering with benefit of better price (a second aspect of the supplier scorecard: business criteria): I could take a decision benefiting to our company to reduce our TCO on this high seller.
Supplier Relationship Management enables a comprehensive view on TCO.
Benefit 2: Efficiency & operational increase
Here this is usually the most obvious part of the vendor Scorecard with metrics on his performance. The vendor KPI Dashboard with scores on Logistics and Quality cast a crude light on:
- Supply Chain: you identify the way to optimize it, without generating costs on your side
- Quality: either you have root cause identification to improve quality or you can outsource costs of quality to your supplier. You win win both ways.
I can share a classical but true example of my past on some gears of cast iron. We were paying a service from our sub-supplier to label those to facilitate our good entrance. And the labels did not stick very well on the greasy materials, so we had a greasy plastic bag. And we still lost labels and lost hours to find what is what, as they all look the same.Thanks to our supplier performance scorecard, we started discussions on this and realized that our supplier could cast at no cost directly the writing in cast iron. Just avoiding: plastic bag, sticky label and additional costs. Just by talking around a 360 degree SRM. Win-Win.
Projects to reduce supplier bases generate internal resistance and objections. The long list of why not doing it will be looping internally: price, service capability, history with a supplier and put your initiative in danger. Less measurable argumentation will be in your way: perceived risk of switching suppliers, personal friendships between supplier sales representative and some of your colleagues. Do not underestimate those.
That is where the buy-in of your management might be necessary to overcome those roadblocks. The latter are largely outweighed by the savings from reducing your supplier base to a clean consolidated spend clustered around strategic suppliers, a couple of integrators and monitored by your SRM. If you supplier base is not that deep, having a primary supplier completed by a dozen selected secondary suppliers is also a possible winning strategy.
Identification of transferable spend:
you shall rely on your strategic suppliers to transition as much spend as possible. Be careful, identification of spend shall be done jointly with supplier, which best knows what it can cover. But do not delegate the risk assessment. This is your part.
Implement a transition plan:
Transition planning includes gap analysis:
- fixing part number differences and data update
- managing specifications change
- switching relationships, and ordering pipeline
- operative specificities with your supply chain
The plan is own by your strategic supplier, as only he has the possibility to reduce risks and implement counter-measure when transition is drifting. You should keep a close eye on it.
You now have seized a saving opportunity: single process, single contract and single datastream. Strategic talks and Business Intelligence can start, and this is our next topic.
Benefit 4: Competitive advantage
This is about long term. Thanks to professional procurement practice (SRM), you install your supplier as co-pilot with you. It does not mean you give him the key on where to go. It means that he is giving you insights, heads-up, and help you take the sharp turn you did not see coming on your own.
Procurement best practice: How to Manage Relationships with Suppliers?
The main question you want to answer is: what is included in supplier relationship management?
There are 3 main areas on how to have a comprehensive system of interaction with your suppliers. You could argue that SRM is englobing everything. Even if this is true in a way, I like to separate the Events and Contracts parts, as those are usually much more complex to put in place on your own in your company. The need separate attention and great energy, as many department, probably high corporate colleagues, are involved.
- SRM – Supplier Relationship System
- Vendors events
- Long term contracts
SRM – Supplier Relationship System
I had a post on this, have a look here for more details.
I will write a post dedicated to this, a couple of lines would not be enough. This is all about:
- networking while showing your (soft)power
- Get commitment while ensuring supplier resources are allocated to you and not your competition
- Knowledge transfer at supplier costs
Organizing such events, were colleagues, time and m2 are involved is a separate topic. Though, all your company will have to be involve in a way. Even if you think small. Believe me :-). Just think about compliance…
Long term contracts
If you like your work like I do, you make it for the long term, not for the show. This is about building with your supplier base a long term partnership. And this goes through multi-years contracts. At least 3-years.
You may have a look at my contract management template in Excel.
There are 4 reasons for this:
- Think big to reach big: If you plan to grow with a supplier, give him perspective and a clear path of commitment. Engagement is a wallet opener at Board level of your supplier. Suddenly you do not talk about a spend of 100.000 USD per year, but a total Spend of 300.000 USD over 3 years. Magic!
- Focus: it will save your time of operative negotiation each year. Thanks to this, you can spend your energy on added value tasks for you. And so will your supplier.
- Timing: negotiate when you can a full framework, for example because you know the guy. Anyway, you can ALWAYS renegotiate later if necessary.
- Transparency: believe me, this is much more difficult to cheat me on a 3 year basis as on a yearly basis. Change your pricing system or your part numbers slightly change every year, and you lose me a little each time. When tight in a 3 years contract, there is no way out for the supplier with cheap tricks.
Soon I will write another post on how to structure those contracts, needs practice and procurement experience to make it right and not too complex. Here you can find a xls template for contract management. I strongly recommend to pay attention to this administrative but necessary part. Pay attention to the stages of contract lifecycle management.
I hope this was helpful, do not hesitate as usual to contact me if you wanna share or have questions.